Twenty seven years ago this Sunday the Dow crashed -22% in one day. It makes last week look calm by comparison.

Market Statistics

Twenty seven years ago on Monday October 19th the Dow sank -508 points. The crash began in Hong Kong and spread to Europe then to the USA. The Dow dropped -22.61% to close at 1,738 on record volume of 604 million shares, nearly twice the prior trading day. Volume would have been much higher but the primitive electronic trading systems were overwhelmed and some orders took days to process. Art Cashin said as he headed to the floor of the NYSE on Black Monday with a disastrous open ahead he uttered to himself "Nos morituri te salutamus", which roughly translated means "We, who are about to die salute you." This phrase was used in 52 AD by combatants about to enter the Coliseum to fight and die in front of Emperor Claudius. I think it was very appropriate as he headed into the maelstrom the NYSE was going to be that day.

It could have been worse since New Zealand dropped -60%. The Dow drop came after a remarkable first half of 1987 where the Dow gained +44%. This is the biggest one-day percentage decline in the Dow on record. The Dow did not return to the August 25th closing high of 2,722 for almost two years.

A couple days before the crash Iranian missiles hit a U.S. flagged tanker off the coast of Kuwait. Five months before an Iranian missile hit the U.S.S. Stark, a frigate, killing 37 sailors. In the early morning hours on the 19th two U.S. warships shelled an Iranian oil platform in the Persian Gulf. Geopolitical tensions were high and they added to the pace of the selloff. Here we are 27 years later and Iran is still a major problem.

The Dow gained almost 200 points at the open on Tuesday the 20th and then rolled over to return to negative territory. It seems the big drop scared the major banks and they called in the credit lines for the big broker dealers. At a time when the market needed liquidity the banks were cancelling it. The Fed got on the phone to the big banks and demanded they reinstate the credit lines immediately and promised to guarantee any losses. The banks reopened the credit lines and the market rebounded.

In 1987 the 30 year yield was 10.12%. Oil was $17.50, gasoline $1.00 and the average price of a home was $127,000.

The situation last week was not so dramatic but the volatility was huge. The VIX soared to 31 as put volume exploded. These levels rarely last but back in 2011 when the government shutdown the VIX held over 30 for more than a month. The volatility eased on Friday to the 2013 highs at 22. Apparently we are not out of the woods yet and investors are still buying puts to protect their portfolio or for speculation.

For the week the Dow declined -689 points from the prior Friday's close and then rebounded +525 points into Friday's close. Anyone holding positions with stop losses were probably stopped out. That was a -8.6% decline from the Dow's 17,350 high on September 19th to the low for the week at 15,855 on Wednesday.

The Nasdaq declined to 4,116 from the September high of 4,610 for a -10.7% decline on an intraday basis from the highs. The S&P declined from a high of 2,019 in September to 1,820 on Wednesday for an intraday drop of -9.9%. While corrections are normally measured from closing highs to closing lows the intraday numbers are typically used by traders trying to jump the gun on a correction rebound. We may still get an opportunity for a correction on closing numbers in the days ahead.

Helping to provide fuel for the rebound was news from Europe that the ECB would begin "within the next days" to purchase assets in new programs to support the economy. Mario Draghi has been promising to begin a QE program for months but the recent string of bad economic reports out of Europe has apparently energized him to actually do something. Time will tell since we have no idea what he is planning or will it be enough to keep Europe from falling back into a triple dip recession or even worse falling into a depression.

The market also got support from Fed President James Bullard saying the Fed should delay the end of QE as a result of slowing growth overseas. The Fed is currently on pace and on message to end QE at the October 29th FOMC meeting.

Oil rebounded to $83 after Goldman Sachs said the decline was "too much, too early" and the market is not oversupplied and a glut has yet to materialize. This energized the energy sector and Morgan Stanley's strong earnings helped power financials higher. With financials and energy the two largest sectors in the S&P the rebound had legs.

The U.S. economic reports were positive and that boosted market sentiment. New Residential starts for September rose from 957,000 to 1,017,000 on an annualized basis for a +6.3% gain. Single family starts rose from 639,000 to 646,000 and multi-family starts rose from 318,000 to 371,000. Housing completions rose +8.6% to 999,000. Housing permits, a gauge of future activity, rose +1.5% to 1,018,000.

Consumer Sentiment for October rose from 84.6 to 86.4 and contrary to expectations for a decline to 84.3. This is the highest reading in sentiment in the last 7 years. Lower gasoline prices and rising job gains were credited with pushing the number higher. The present conditions component was flat at 98.9 but the expectations component rose from 75.4 to 78.4. Consumer inflation expectations ticked down again for the third month since the high of 3.3% in July. The October reading was 2.8%.

As proof the job market is improving the weekly jobless claims on Thursday came in at 264,000 and a 14 year low. Not since April 2000 have we seen claims at this level. Apparently employers are comfortable with their existing employment levels heading into the holiday season.

The economic calendar for next week is fairly light. Existing Home Sales and New Home Sales are not likely to stimulate the market. We are moving into that period of the year where sales are lackluster. However, it is possible the lowest mortgage rates in 16 months will energize some buyers.

The two Fed surveys on Thursday are probably going to show more of the same with mediocre growth or a minimal slowing of activity. The Philly Fed last Thursday declined from 22.5 to 20.7 but that was less than expected at 19.9. This was the second consecutive monthly decline from the high of 28 in August. The Philly Fed Survey sets the tone for the month and the surveys to follow normally report similar trends. The disappointment for last week was the NY Empire Manufacturing Survey, which fell from 27.5 to 6.2 and the lowest level since April. New orders fell from 16.9 to -1.7 and into contraction territory. Inventories spiked from -7.6 to +2.3 suggesting sales had suddenly slowed. While the reports this coming Thursday are not expected to show that dramatic a decline they are not expected to show any material gains. The economy is continuing to post modest to moderate gains as explained in the Fed Beige Book last Wednesday.

Our muddle through economy is why the deterioration in Europe and China is so important. It the rest of the world continues to weaken we don't have a strong enough economy to be self supporting. We are likely to catch the same cold.

No new splits announced last week.

There were four important earnings reports on Friday. General Electric (GE) posted earnings of 35 cents (+11%) or $3.54 billion on revenue of $36.17 billion. That beat estimates by a penny. While GE does not give specific guidance the company said it expects a strong Q4 thanks to shipments of equipment and better profit margins. CEO Jeff Immelt said "the U.S. is probably the best we have seen it since the financial crisis." In the conference call with analysts discussing the global economy he said, "It is a slow growth pattern with volatility, but not a lot different than what we have seen in the past." He said there were pockets of high activity in the developing world but slow growth in Europe and Japan. GE earnings are not watched for their actual earnings but for their economic guidance since they operate in multiple sectors on a worldwide basis. This is an economic report more than an earnings report. GE shares rallied +2.3% on the news.

Honeywell (HON) reported adjusted earnings of $1.43 ($1.19 billion) to beat estimates of $1.41. Revenues rose +5% to $10.108 billion, which also beat estimates slightly. Aerospace revenues were flat at $3.895 billion to do a divestiture during the quarter. Segment profits rose +8% to $790 million and profit margins rose 150 basis points to 20.3%. Automation solutions revenue rose +9% to $3.671 billion with profits rising +11%. Revenue in materials and technologies rose +7% to $2.542 billion with an 8% increase in profits. Cash and equivalents at the end of the quarter were $6.4 billion and long term debt was $6.8 billion. They raised the low end of full year revenue guidance and raised the forecast on earnings per share by 5 cents to $5.50-$5.55. Free cash flow is expected to be $3.9 billion. They warned that 2015 would probably continue to be a slow growth environment but they would continue to deliver strong earnings growth.

Honeywell is one of those sleeper companies that you never hear about until the earnings report every quarter. However, all of us have multiple Honeywell products in our homes and we use Honeywell products every day in some form. I thought the earnings were very good. There were solid gains in every area, they are making a nice profit and have very little net debt compared to cash. I wish every company was as stable as Honeywell and they pay $1.80 a year in dividends. They are actively considering several acquisitions in their plan to spend $10 billion over five-years that they laid out in March. Shares rallied +4% on the news.

Textron (TXT) reported a surge of +61% in earnings to 60 cents compared to estimates of 53 cents. Revenue of $3.43 billion rose +18% but missed estimates of $3.63 billion. Textron makes Cessna and Beechcraft planes, Bell helicopters and military vehicles. The company said demand was strong and is poised to exceed the number of planes they can produce this quarter. CEO Scott Donnelly said, "We have seen a pretty significant uptick in terms of demand and the level of activity out there and it is pretty much across the board."

That comment suggests the U.S. economy is stronger than most people expect. When coupled with Immelt's comments in the GE earnings I see this as bullish confirmation the economy is strengthening.

Morgan Stanley (MS) reported adjusted earnings that rose +87% to 65 cents that easily beat estimates of 54 cents. You can thank the Alibaba IPO for a lot of that. Morgan Stanley has underwritten the most IPOs of any bank in the first nine months of 2014. Equity underwriting almost doubled to $464 million. Trading and investment banking revenue surged 22% to $4.52 billion. Bond trading revenue spiked +19.4% to $997 million. Net revenue overall rose +7% to $8.69 billion compared to estimates of $8.17 billion.

The earnings cycle so far has come in better than expected. Entering the Q3 earnings the growth estimates had declined to about 4.1% as of Sept 30th.

Earnings so far this quarter have produced decent results. Of the 82 companies that have reported 68% have beaten earnings estimates (below the average of 73% for this point in the cycle) and 63% have beaten revenue estimates (above average). The blended earnings growth rate so far is +5.1% but we are just getting started. Forward estimates as of Friday had risen to +7.5%. Of the 68 companies that reported and hosted conference calls 44 of them cited Europe as a Q4 concern with 20 citing some negative impact on the call. On those same calls 38 companies cited dollar strength as a problem and 29 said it would have a negative impact on Q4. Only 25 companies cited China during their calls and only 7 warned of a negative impact. Only 6 companies mentioned Ebola on their conference calls.

Future earnings growth expectations for Q1 are currently 8.9% and Q2 10.1%. Revenue growth is significantly less at 3.7% and 3.1% respectively.

As of Friday's close the forward PE for the S&P-500 is 14.4 using the Factset 2015 earnings forecast of $129.31.

Earnings guidance has not been outstanding with 46 negative updates compared to only 30 positive updates. Despite the apparent imbalance this is actually better than expected. Normally negative guidance is 2:1 over positive guidance. In Q4-2013 it surged to 11.4 to 1 and the most negative since Q1-2001. If it holds in the current 1.5:1 range that would be bullish. Those giving in line guidance totaled 53.

This is even more bullish since Q4 guidance is normally the most negative. Companies that kept quarterly guidance throughout the year in expectations for sales to pickup now have to correct that guidance going into Q4.

Next week there are 130 S&P companies reporting with 12 Dow stocks. The energy sector is going to be a real drag on the overall earnings gains. Revenue growth is expected to decline -5.1% and earnings -4.4% because of the decline in oil prices in September.

Apple will start the week off with a bang on Monday with IBM and Texas Instruments also playing a supporting role. Amazon, Microsoft and GM will lead the lineup on Thursday. UPS will close the week on Friday.


For an avid market watcher the last couple of weeks have been interesting to say the least. We have not had the normal bouts of selling that one associates with corrections. We did have some very negative days with some big triple digit swings but we really did not get the volume imbalances you would expect.

Strangely the biggest imbalances were on the 9/10th at 7:1 and 5:1 in favor of decliners. However, the biggest negativity was in the four days highlighted where 52-week lows rocketed higher.

I am sure if I had taken a snapshot at noon on Wednesday it would have been close to 10:1 negative when the Dow was down nearly -400 points. Because that was a V bottom day the morning was negative and the afternoon positive that leveled out the A/D volume and the A/D ratio. Note the volume soared to nearly 12 billion shares on Wednesday.

It has been about 40 months since we had a real 10% correction on the S&P. This one does not count since we have not closed below 1,809 and an official -10% correction on a closing basis. If the market continues higher next week this will go down as just one more headline dip that was bought.

Note that the cumulative Advance-Decline line on the S&P bounced exactly where it should have. The percentage of S&P stocks trading over their 50-day average dropped to only 13.4% on Wednesday.

The percentage of stocks still showing a point & figure buy signal fell to 41.6% and the lowest level since August 2011 and the S&P debt downgrade on the USA. The decline in October was very dramatic.

All of these charts only show one thing. The S&P went from a new high on September 19th to very oversold on October 15th. They do not tell us if the rebound is going to continue or will the S&P roll over into a full 10% correction. I wish I had an answer but I don't.

What I do have is a caution. While I hope next week will bring more gains there was a critical signal on Friday. All the major indexes with the exception of the Russell 2000 failed at the same relative level. The Russell failed but at an even stronger level at 1,100.

The S&P stalled at a key Fibonacci retracement level and right where a bear market bounce should have run out of steam. Carter Worth called it the "kill zone" for bear market rallies.

Another key point is that the S&P has traded under its 200-day average at 1,906 for the last four days and that should be turning into stronger resistance every day that the S&P lingers below it. This was the first time the S&P has traded below the 200-day in 475 trading days or just over 2 years. That is the longest streak ever with the second place streak of 385 days in 1963-1965 and then again in 1995-1996.

On the plus side the S&P did test some pretty decent support at 1,815 from April and rebounded strongly. The dip only took it to 1,820 but that is close enough for me.

In order for this rebound to continue the S&P has to conquer the round number resistance at 1,900 and the 200-day at 1,906 with positive hang time counted in days not minutes. Traders probably bought the dip because it was the right thing to do given the intraday signals at the time. Investors are probably still on the sidelines waiting to see if the rebound will stick. Until both groups are committed to a single direction the rebound is at risk.

Fortunately if the S&P does move over 1,906 the next major resistance is 1,950 and that puts us back within striking distance of a new high before yearend.

The Dow rebounded to close +12 points over what should have been decent resistance at 16,368. Like the other indexes the Dow closed just below prior resistance at 16,462 and a likely place to fail if traders don't charge out of the gate on Monday morning.

All 30 Dow components were positive but quite a few were only fractional gainers. On a +263 point gain you would have expected more of the laggards to participate.

The Dow broke support at 16,025 twice but never closed below that level. However, the drop to 15,855 is a significant break and I have no illusion of hope that the 16,025 level will hold on a retest. If we don't go up from here I firmly expect to see the Dow decline to the 10% correction level at 15,555.

The Nasdaq did not make it back to resistance at 4,300 but came close with the high at 4,296. At this point I don't have a lot of confidence the Nasdaq will continue higher. The Netflix disaster and the chip sector uncertainty should keep it volatile until after Apple reports earnings after the bell on Monday. That earnings report, along with IBM and TXN, will give us direction for Tuesday.

The Nasdaq closed in no-man's land at 4,258 with no material support or resistance nearby other than the 200-day at 4,301. It could go either way next week but the path of least resistance is down.

The Russell 2000 was the hero for the week with a +2.75% gain. Of course it had been the leader to the downside for the last month and it is still down -7% for the year. If the Russell 2000 continues to rebound it should drag the big cap indexes along. However, the Russell rebounded to strong resistance at 1,096-1,100 and the selling began again almost immediately.

Given the Russell's +60 point rebound from the 1,040 low we should have expected sellers to return at that 1,100 level. The challenge is continuing the rebound through that level without losing traction and that may be a tough task. Support is now well below at 1,045 and despite the rebound the chart is still negative.

The Russell 3000 broad market index ($RUA) declined -121 points from the recent high of 1,201 to enter correction territory intraday. The rebound was immediate and it is now back above the prior support at 1,110. In theory this should be positive for the broader market as long as there are no further dips back below 1,110. The chart is still negative but the close was positive.

The Dow Transports were the big winners for the week with a +254 point gain. Obviously the sharp decline in oil prices to below $80 on Wednesday was a big factor. The transports are well above prior support at 8,000 but the chart is broken. That big drop below support damaged sentiment and I would not be too surprised to see a retest.

Remember the markets declined around 17% when QE1 ended. When QE2 ended they declined about 13%. The Fed balance sheet is now $1.5 trillion higher than it was at the end of QE2 and stocks are significantly higher. I have said repeatedly the odds for a decline as QE3 ends this month are very high.

I would be very careful about initiating new longs next week. The charts are still bearish despite the rebound. You don't have to be in the market every day. Sit back and wait for the fat pitch and pick your entry points.

Corrections are normal. Going more than two years without one is not. Since 1927 there have been 210 corrections of 5% or greater. The median correction lasted 22 sessions and declined an average of -8.24%. The average correction, which included some outlying events, averaged 40 sessions and a decline of -12.19%. The current correction from peak to low on the S&P was -9.1% and has taken 19 sessions. In theory we could be done with the decline but in practice this may be an outlier. All the prior dips in the current trend rebounded when they hit the bottom of the uptrend channel. This decline broke the trend and it could be telling us there is more pain ahead.

Random Thoughts

Citigroup said the recent decline in oil prices to a four-year low will provide up to $1.1 trillion in stimulus to global economies by lowering the cost of fuel and other oil related commodities. Citi said the average consumer would save $600 a year if prices were able to remain at this level. Brent fell to $83.37 and more than 20% below its three-year average. That represents a savings of about $1.8 billion a day for consumers. The next OPEC meeting is November 27th and recent comments from Saudi Arabia and others suggests they will not cut production. Global supplies have risen to the highest since 1965 thanks to surging production from oil shale.

The global economy is expected to rebound +2.98% in 2015 according to a Bloomberg survey of analysts. If oil prices remain low it will boost the global economy even higher with one analyst suggesting it could add +2% if prices stay in the low $80s. I am not holding my breath on that. The global population rises 200,000 per day. If you continue that thought it means there are 200,000 people reaching working age every day and becoming independent consumers of oil. Oil demand is still growing at an average of 1.2 million barrels per day every year. For 2014 demand will grow by 650,000 bpd to 92.7 mbpd according to the IEA. That is the slowest growth rate since 2009. Right this minute oil supplies are growing faster than the 1.2 mbpd average growth rate but this will end in 2016-2017 when the main fairways in the U.S. shale fields have all been drilled. Future wells on the edges of the basins will cost more and produce less and the rapid first year depletion rates of 65% will catch up with production and overall output will begin to decline.

U.S crude production rose to 8.95 million bpd last week and the highest level since 1986. We still had to import 7.74 million bpd so it is stupid to be making claims that the U.S. should export its excess oil. We don't have any excess oil. What we have to light sweet crude and we are importing heavy sour crude. We should be converting some refineries to process more U.S. crude in order to make ourselves self sufficient.

About 2.6 mbpd of global production requires a price of $80 or more per barrel to be profitable according to the IEA. About 4% of U.S. shale output requires that level and about 25% of output from the Canadian oil sands requires at least $80. Goldman Sachs predicts that drilling in the Bakken will decline with WTI under $90 and Jefferies pegs that number at $80. However, Morgan Stanley said oil would have to trade down to $50 for 12 months before output would decline -500,000 bpd. I have a hard time believing that.

Ebola, Ebola, Ebola. That is almost all you hear on the news and it is time for that news to fade. Yes, there are 4 patients with Ebola in the U.S. right now. With a 50-70% fatality rate there is a good chance at least one of them will die. That would bring the 2014 Ebola death rate in the U.S. to two. Yes, it is a terrible disease but it can only be contracted by physical touch with an infected person's bodily fluids.

In the U.S each year between 3,000 and 50,000 people die from the common flu depending on which strain attacks and the hardiness of the strain. There is almost no scenario where Ebola is going to kill 3,000 in the U.S. over the next year and it would be nearly impossible to reach the 50,000 mark that we accept every few years from the common flu. So why is this virus so newsworthy? It is because Ebola is unknown in the U.S. and it is a gruesome illness. It is a hemorrhagic virus. That means it breaks down your cell walls and you bleed everywhere. It is accompanied by explosive vomiting and diarrhea. It is a very uncomfortable and embarrassing way to die. This is really scary and people are deathly afraid of a potential epidemic.

There is a concrete reason to fear Ebola. Every person that gets infected by Ebola there is the risk it will mutate into something else even more deadly and possibly transmitted by air. Every infected person is like a walking Petri dish with millions of virus cells interacting with the existing antibodies in that person's body. There are billions of combinations since every person's health history is unique as is their bodies reactions to those prior events.

CDC officials have already documented more than 300 changes in the virus since this current epidemic began several months ago. There were five major strains of Ebola prior to this outbreak. The virus was first discovered in 1976. Viruses such as Ebola, whose genomes are made from ribonucleic acid, are constantly mutating. Some mutations are good and some are bad. Sometimes they mutate into something that becomes less virulent and the virus dies out on its own. Sometimes they mutate into extremely virulent forms that transmit easily and multiply faster. The current 21 day incubation period could shrink considerably if the virus mutated into a more virulent form. It could become airborne like measles from a patient's breathing or become hardier and last longer on surfaces outside the body.

U.S. citizens Ebola fears were heightened last week after the Texas nurse flew Frontier airlines from Dallas to Cleveland and back while feeling "not right" and running a low grade fever. Frontier is trying to contact 1,300 passengers that flew on the plane carrying the nurse both while she was on it and the six flights after her trip. The plane was finally taken out of service and has been cleaned 9 times and fumigated with an aerosol mist that kills any bacteria or virus that it touches. The passengers on the initial plane from Dallas to Cleveland are also being contacted even though she did not have any outward symptoms on that trip. Two schools have been closed, one in Dallas and one in Ohio, plus a bridal shop in Cleveland until the 21 day period has passed.

Elsewhere a lab worker that processed some of Thomas Duncan's lab samples is quarantined to his room on the Carnival Magic cruise ship. When it was found that the worker was on the cruise the ship was denied entry to Belize and Cozumel. It is returning to its home port of Galveston with 4,500 angry passengers. The worker has no symptoms.

This shows how quickly the virus could spread if it arrives in the U.S. undetected. People will originally think they just have a cold or flu and continue with their activities until they become so sick they have to stay in bed. The people surrounding Duncan in Dallas knew they were exposed and were being monitored. If Ebola gets into the U.S. undetected the contagion rate could be huge because we are a very mobile society unlike villagers in Liberia that never leave their home village. This is what is really scaring U.S. citizens. The president will not halt visas for people from the African nations where the disease is raging so about 150 people per day enter the U.S. with nothing more than a questionnaire and a spot temperature check. If you wanted to get into the U.S. for medical treatment just in case you had been exposed I would expect you to load up on Aspirin or Tylenol to force your fever down before the spot check. I think these checks are designed to make us feel that something is being done rather than actually take some serious action.

China said it was opening up its two-child policy two years from now. China has had a one-child per couple policy for a long time and it is impacting their birth rate and the labor force population between the ages of 16-59 fell in the last two years because of a shrinking worker pool. Chinese President Xi Jinping relaxed the one-child policy last year to allow some couples to have two children. At least one parent had to have been an only child. The change in the laws failed to create a baby boom. Only 3% of the 11 million Chinese couples eligible applied for permission to have a second child. Only 690,000 couples applied and 620,000 were approved. On Friday the director of the Chinese Academy of Social Sciences said "We will fully relax the policy" in two years. "People wish to choose the number of children they want to have, and they should be given the choice, at least for two children." Couples can "apply" to have a second child. The UN projects the population of China will begin to shrink by 2030 if the birth rate is not increased.

Things are not going well for President Obama. Democratic candidates don't want him to campaign for them. Just send the money. The Ebola outbreak was never supposed to make it to America and that did not go as expected. He had to cancel some fund raising trips and a golf game last week to deal with the Ebola headlines. Lastly he went out to dinner at the fancy Estela restaurant on East Houston Street in New York a couple weeks ago. When he presented his credit card to pay for the meal it was declined. He tried to laugh it off with the waitress but that had to be really humiliating. Fortunately, Michelle had her card and paid for the meal. This year is just not turning out well for the president.

Mario Draghi has been talking a strong game for the last couple years but his lack of action has finally run its course. Yields on the German Bund fell to an all-time low of 0.72% and the lowest level of any major European country in recorded history. The flight to quality is not going to stop until Draghi and the ECB actually take action to stave off a potential depression. The credit chief at UBS, Andrew Roberts said, "If the ECB does not act in the next few days this could snowball." At this point it could be too late. There is no common treasury security in the EU unlike the USA. If the ECB is going to do a QE program it is unclear how they would do it. There is also the question of how much they can actually do. They are not like the Fed in the USA. The ECB has limits and some EU countries oppose the concept of QE, Germany being one of them. The various yields across the EU are starting to price in not only a protracted economic slump but the potential for a default or even a breakup. There was another big article last week claiming the EU would dissolve within two years. Greece is again a problem with the PM promising to break free of the EU and IMF and return to the markets for debt financing. That pushed Greek yields up to 9% within a week. Trouble is brewing in Europe and it will continue to weigh on our markets.

Russia's credit rating was cut by Moody's Investor Service on Friday because of sluggish growth prospects that have been worsened by the Ukraine sanctions, weak ruble and falling oil prices. Moody's cut Russia's credit from Baa1 to Baa2 and kept a negative outlook on the country. This is the same rating as Fitch and one step above S&P, which cut Russia to BBB- in April. Russia has spent $13 billion so far this month to support the ruble and it is not working. Moody's said the gradual and ongoing erosion of the country's international reserve buffer contributed to a weakening of their creditworthiness. Foreign reserves have declined -11% to a four year low of $452 billion.

Russian bonds are trading at a 3.23 percentage point premium over U.S. treasuries. That has almost doubled since the end of 2013. Moody's expects Russia to fall into a recession in 2015 with a -1% contraction in GDP. Personally I think it will be a lot worse. Russia pumps over 9 million barrels of oil per day. The income off that oil is based on Brent prices, which have declined -25% over the last two months. That means they are selling their oil for 25% less today than just a few months ago. This means they are getting $774 million a day for their oil at current Brent prices compared to the June rate of $1,008 million, a drop of -$234 million a day. This is really, really painful for Putin when it comes on top of the sanctions. Russia's state owned Sberbank, Russia's largest, said the country needs oil to be over $104 in 2015 to balance its budget.

The country has said it is going to boost military spending +21% in 2015 but with falling oil prices I would expect that spending program to be cut back significantly. Putin has a habit of nationalizing assets when it is suffering financial problems. Watch for Putin to seize something in the near future to bolster Russian spirits and government bank accounts.

So far in October the Dow is down -5.3% and the S&P -5.6%. This ranks as the seventh worst October for the Dow since 1950 and the fifth worst for the S&P. In the last 64 years the Dow and S&P declined in October 26 times. After those declines the market rallied in November 23 times with an average 4% gain according to the Stock Trader's Almanac. We are entering the strongest six month period of the year starting November 1st. October dips are normally bought with a surge into year end.

The market may be down -9% at its lows but investors are not pulling money out of equity funds. According to the outflows have been "remarkably light" with only -$1.6 billion withdrawn so far in October. The company said this is negative for stocks because there is no panic. Bottoms are not formed until investors panic. Even worse leveraged short funds saw huge outflows of -5.6% last week and -10.2% for the last two weeks. Investors are cashing out on short bets. Reading between the lines the average investor is still bullish.

China is poised to report its slowest growth since the financial crisis at 7.2% GDP for Q3. For 2015 estimates are now for 7.0% growth and some feel it will be worse than that. However, the government's target is 7.5% for 2014 so there could be some padding when it comes to the reporting. Over the last 30 years China has averaged growth of about 10% so this is a material weakening of their economy. Starting in 2010 through 2014 growth was 10.5%, 9.3%, 7.7%, 7.7% and 7.3% is the likely result in 2014.

The only thing that is thriving in China is the state sponsored hackers. The FBI sent a warning to businesses on Wednesday that state sponsored hackers are "exceedingly stealthy and agile" and have used customized malicious code that was undetected by security researchers and law enforcement. The warning hinted at an increasingly public confrontation in which the U.S. claims the Chinese government is conducting a long term, widespread campaign of economic espionage. Despite U.S. charges and the indictment of five Chinese military officials accused of stealing trade secrets the hackers continue to operate. The FBI said in addition to banks they are targeting defense contractors in multiple countries and many multinational corporations. The FBI said Chinese hackers "routinely steal high value information from U.S. commercial and government networks through cyber espionage."

The Census Bureau said on Thursday that 48 million Americans live in poverty and 16% of American children are living in poverty. Some 46.2 million people are on food stamps. The official poverty line is $23,283 for a family of four. In some cities it is over $30,000 because the cost of living is higher. California's poverty rate last year rose to 23.4%. Some 11 million people fell under the poverty line because of increasing medical expenses.

The Flash Crash in the bond market last week sent the yield on the ten-year down to 1.868% for a short time on Wednesday. The drop in yields were almost immediately reflected in the mortgage market with the 30-year rate falling to 3.97%. That means the monthly payment on a $200,000 mortgage would be $951 per month. The catch is that nobody can qualify for the loans.

The battle against ISIS for Kobani is continuing but the U.S. and its partners have stepped up the attack. More than 70 airstrikes were carried out on Friday and ISIS is getting pounded from every direction. However, some analysts claim that the ISIS attack on Kobani is really just a distraction to divert attention away from their real target of Baghdad. Some say it is only a matter of time until the U.S. embassy is attacked with vehicle borne IEDs followed up by a flood of ISIS infiltrators that have been moving into Baghdad in small units to evade detection. Daily car bombs are becoming more common in Baghdad as they chip away at the morale and infrastructure of the city.

The war finally got a name. The Pentagon said it rejected the name "Inherent Resolve" a few weeks ago because it was too neutral. However, no new name was forthcoming and Inherent Resolve has been surfacing more often in discussions. The politics of the issue is the problem. If you name it, you own it and many reporters claimed the White House did not want the war to have a name. According to a Defense Dept official, "They don't want to own it."

The Iraqi government has asked to buy another 800 Hellfire missiles from the USA. Congress approved an order for 5,000 in August and more than 1,100 have already been delivered. Lockheed Martin (LMT) assembles them in Alabama and with three shifts their current capacity is about 500 a month. Looks like they need a bigger plant because this war is going to last a long time.

Only 67 shopping days until Christmas.

Enter passively and exit aggressively!

Jim Brown

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"To argue with a person who has renounced the use of reason is like administering medicine to the dead."

Thomas Paine